BHP (ASX:BHP) believes China’s economy remains strong enough to support iron ore and other commodity prices despite evidence of a slowdown in the Asian economic powerhouse.

Iron ore prices hit record highs of US$237/t in mid-May as Chinese steel mills, fuelled by major post-Covid infrastructure spending, increased their output by 12% year on year through the first half of 2021.

The Chinese government subsequently stepped in to quell prices by enforcing steel output restrictions on environment grounds, promising to limit steel production to levels seen in 2020.

But since then a bigger issue has emerged, with an existential threat to China’s second largest property developer Evergrande and debt levels across the Chinese property market raising concerns demand for iron ore and other industrial commodities could fall off a cliff.

In a downturn scenario, Bis Oxford Economics estimated global metal prices would be 30% lower in Q3 2022 than in its baseline forecast, with iron ore prices down 44%.

Those were allayed in part yesterday, as miners rose on reports Evergrande had made a last ditch loan repayment to stave off bankruptcy China could adopt credit policy more friendly to local developers.

BHP CEO Mike Henry said on a media call after the iron ore giant’s AGM yesterday the “outlook for economic growth in China and elsewhere does remain very positive.”


No record prices, but outlook still positive

Despite seeing prices drop under US$90/t for the first time in over a year this week, Henry said iron ore prices – still several times BHP’s cash costs – remain high.

“All I can say is we’ve enjoyed a period of record high iron ore prices and yes prices have come back a little bit off the back of the less strong economic signs in China and the specific cutbacks in steel production,” he said.

“But let’s remember two things.

“One is iron ore prices are still high, they’re just not at the record highs which gives you a sense of the support in terms of underlying supply and demand for iron ore.

“The second thing is the Chinese steel industry will produce over a billion tonnes of steel for the third year running.”

He added another factor for prices coming off record highs was rising supply out of Brazil and Australia, not just a drop-off in demand.

“Now one final point to note is part of the driver for record high iron ore prices was supply side driven, not just demand side driven and of course … you would expect there would be supply coming back out of Brazil and increases in Australia,” Henry said.

“So we’re certainly not forecasting we will see long term prices aligned with the record high that we saw but in the near term we tend to see a bit of support for prices.”


BHP top brass face climate critics

Henry and BHP chairman Ken Mackenzie spent the bulk of the meeting responding to questions from shareholders critical of its decision to hive off its oil and gas assets into Woodside (ASX:WPL), as well as allegations of approval and Aboriginal heritage risks around Woodside’s $16 billion Scarborough project.

“We are confident the proposed transaction with Woodside is the best outcome for shareholders,” Mackenzie said in response to one of the questions.

“Even as the world decarbonises it will still need oil and gas for decades to come.

“We are comfortable that Woodside is the right partner … it’s publicly supported the Paris Agreement, it has very similar operational emissions reduction goals to BHP.”

Henry said in a world that would still need gas as it decarbonised, Scarborough would have a lower emissions footprint than many other projects.

The spin-out of its petroleum business was one of four major deals BHP announced in August last year to transition its portfolio towards “greener” investments.

It this year sold its stake in the Cerrejon thermal coal mine in Colombia to co-owner Glencore and this week announced the US$1.2 billion sale of its 80% share in the BHP Mitsui met coal JV in Queensland to Stanmore Coal (ASX:SMR).

But the process to divest New South Wales’ largest coal mine, Mt Arthur, appears to be more challenged.

Asked whether BHP may be inclined to keep the asset and manage the mine to closure in what it acknowledges is a challenging environment, Mackenzie said options were on the table.


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